How Larry Ellison’s Jury Box Email Could Cost HP Billions

Oracle CEO Larry Ellison had a 15-minute break with nothing else to do, so he typed up a few sentences that would end up costing HP billions of dollars.

Never one to shy away from the courts, Ellison was on jury duty in March of last year, hearing a case about a woman who slipped on a patch of diesel fuel at a car dealership in Half Moon Bay, California. One afternoon, during a break in the trial, he drafted a press release announcing that Oracle would pull the plug on all software it offered for HP servers based on the Itanium chip, a big, beefy microprocessor that HP had nurtured alongside Intel for more than a decade.

The decision was a long time coming, and there were certainly good business reasons for pulling the plug. Though Itanium was once billed as a chip that would dominate the computer world, it never really took off, and by March 2011, HP was the only major server marker still selling Itanium machines. But judging from thousands of pages of court records detailing the situation, Ellison also drafted that press release out of spite, hitting back at a company that had fired one of his close friends before hiring a man he deeply despised.

The result of that spite is that HP and Oracle are now embroiled in a billion-dollar court case, and this week, the case comes to trial in the Santa Clara County courtroom of Superior Court Judge James Kleinberg. The case has it all: billions of dollars at stake, a sex scandal, powerful Silicon Valley friendships, criminal charges, dark animosity, and darker fears of retribution. In other words, it’s business. But it’s also very personal — as business always seems to be with Larry Ellison.

In a strange way, it all starts in another courtroom just a few miles north, with that slip-and-fall suit that saw Ellison show up in a jury box in San Mateo county. Ellison was already spending a lot of time with lawyers in the spring of last year. Oracle was engaged in a bitter lawsuit with software rival, SAP, and it was suing Google too. Just months earlier, Oracle had settled another acrimonious lawsuit, this one with HP over Ellison’s decision to hire HP’s tarnished CEO Mark Hurd.

“I had nothing to do for 15 minutes, so I drafted a press release” – Larry Ellison

Ellison often uses lawsuits as an extension of his company’s public relations efforts. So it came as little surprise that when Oracle’s CEO was eventually picked for the Miramontes jury, he served as foreman.

The trial kept him away from some of his Oracle duties. He missed the company’s quarterly earnings call that month, for example, but he did manage to squeeze in some work while in court. During a break from the trial, which started March 22, Ellison drafted the press release that changes the future of HP and Intel and so many Itanium customers.

In a Feb. 28, 2012, deposition, Ellison explained it this way: “I … had nothing to do for 15 minutes, so I drafted a press release,” he said.

Microsoft and other software makers had already walked away from Itanium, but Oracle was different. It had partnered with HP to sell billions of dollars in Itanium server hardware and Oracle software to some of the biggest companies in the world. Oracle had stopped supporting HP’s processors in the past, though never before HP itself had begun to wind them down.

But things had changed the year earlier, when Oracle had decided to buy one of HP’s biggest rivals, Sun Microsystems. Now Oracle wasn’t just a software company. It sold servers too.

Still, when Ellison sent his draft press release to Oracle co-president Safra Catz, almost nobody knew it was coming: not Intel, not many within Oracle itself, not Oracle’s customers, and, least of all, not HP itself.

Can you spot Larry Ellison waiting to be selected from a San Mateo jury pool in this March 2011 picture? Photo: Davis W. Frank

At 3 p.m. PDT on Mar. 22, Catz sent the approved press release from her iPhone — the word Itanium misspelled as “Itaniem” — to three of the company’s top PR, marketing, and government affairs executives.

Catz added just two words of commentary for the benefit of her staffers: “Buckle up.”

Five hours later, it hit the newswires, setting off firestorms at HP and Intel. The next day HP’s new CEO Leo Apotheker went onstage at his first-ever stockholder meeting, but the trade press was abuzz, wondering how big of a blow Oracle had dealt to Itanium.

For a quarter century, Oracle and HP had been the best of partners. When Mark Hurd was CEO at HP, he and Ellison were tennis buddies, so friendly that they informally discussed buying Sun together at one point, and even batted about the idea of merging HP and Oracle. But then Oracle bought Sun on its own. Hurd was forced out of HP following accusations of sexual harassment. And in his place, HP hired Leo Apotheker, the former CEO of SAP, the company that Oracle had accused of stealing its trade secrets.

The result was Ellison’s press release — a death knell for HP’s 25-year-old Unix business, a line that still brings the company more than $2 billion in revenue each year.

The Unsinkable Itanic

Starting in the mid 1980s, HP-UX had grown to be a critical back-end system for data centers in big businesses such as banks and telecommunications companies. And for many of them, Oracle’s database and business software was a crucial element. A quarter-century ago, Unix companies designed their own processors and servers, and stitched together their own versions of Unix with names such as Solaris, HP-UX, Irix, and AIX. But by the late 1990s, Windows and Linux servers — and the low-cost x86 Intel chips that they shipped with — were putting pressure on this business model.

So Intel and HP came up with a plan: They would co-develop a new chip, called Itanium. It would be an alternative to the expensive Unix chips built by HP, IBM and the others, but it would be designed for the back-end enterprise systems where Unix was running strong. If all of the Unix companies — IBM, SGI, DEC, and HP — could get on board with Itanium then they would save the money they were spending on chip design, and still have a higher-priced alternative to x86. Eventually, Intel hoped that Itanium would replace x86 itself, and become a mainstream processor used on desktop PCs.

That was not to be. It turned out that x86 was good enough. And, under pressure from AMD, Intel steadily improved its Xeon processors, so that they trounced the expensive Unix chips, including Itanium. Today, burdened by shipment delays and lackluster sales, Itanium is mockingly called Itanic, one of Intel’s biggest mistakes. But it’s a mistake that HP married when it bet its Unix future on the troubled processor. It’s also a mistake that Oracle has made a pastime of exploiting since it bought Sun two years ago.

It’s a mistake that Oracle has made a pastime of exploiting since it bought Sun two years ago.

HP executives were worried by the Sun purchase, but after Oracle’s co-president Safra Catz invited heads of HP’s business division, including services chief Ann Livermore and server boss David Donatelli to an Apr. 16, 2010 meeting at Oracle’s Redwood Shores, California, offices, things seemed to be on track. The two companies identified a dozen or so business opportunities and agreed on ways to move forward against a common enemy: IBM.

But a few months later came the Mark Hurd scandal. That pushed everything in a downward direction. Hurd had been accused of sexual harassment by Jodie Fisher, a former B-movie actress and Playboy model who had worked as a facilitator during HP customer events. Hurd and Fisher eventually settled the matter, but he was ultimately forced out of HP by the board, which felt he’d mishandled it by hiding her name from expense reports covering meals the two had had together.

The Larry Risk

Ellison pounced. After blasting HP’s board for making the “worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago,” he hired his tennis buddy Hurd to run Oracle’s sales and operations.

Now HP wasn’t just competing head on against Oracle. It was competing against its own former chief, a man who knew every important detail of HP’s business strategy from the previous five years. “Mark is an incredibly bright man with a memory like a steel trap, and so we were concerned about how much confidential information Mark had,” said Livermore, in a deposition given four months ago for the Itanium trial. “And we were also concerned about whether he had any ill will towards HP.”

Hours after Hurd was hired at Oracle, HP filed suit against him, claiming that his new job at Oracle would violate confidentiality agreements he’d signed on his way out at HP.

“Frankly, they thought that Larry was a little crazy and was going to breach all of the agreements with HP.” — Oracle General Counsel Dorian Daley

As far as Ellison is concerned, it was the HP Board of Directors v. Lawrence J. Ellison. “The H.P. board is making it virtually impossible for Oracle and H.P. to continue to cooperate and work together in the I.T. marketplace,” he said.

After the Hurd incident, Ellison had it in for HP’s board. “I was furious,” he said during his 2012 deposition. “I thought that my anger should be directed towards those people who had fired Mark Hurd and those people who were suing us, not at HP at large,” he said.

HP’s board was worried and Oracle knew it. “Frankly, they thought that Larry was a little crazy and was going to breach all of the agreements with HP,” said Oracle General Counsel Dorian Daley in a Jan. 17, 2012 deposition.

Over at HP, they had a name for it. They called it “the Larry risk.”

In truth, the lawsuit and the venomous public rhetoric was bad business for both Oracle and HP. And so, spurred by a phone call from Larry Ellison to HP board member Marc Andreessen, Ann Livermore and Safra Catz hammered out a deal. Hurd would give back millions of dollars in stock grants and would be strictly prohibited from calling on key HP customers such as AT&T, Boeing, and Citigroup.

The companies also agreed to do one other thing thing, listed out as item number one in the settlement agreement. They reaffirmed their partnership. “Oracle will continue to offer its product suite on HP platforms, and HP will continue to support Oracle products … on its hardware in a manner consistent with that partnership as it existed prior to Oracle’s hiring of Hurd,” the agreement states.

That one item is now the fulcrum beneath this week’s court case. To hear Oracle tell it, the reaffirmation was simply a press-release kind of thing, a way of reassuring customers that the two companies had patched things up. HP’s position is that it was a promise by Oracle that it would not do exactly what Larry Ellison had done with his Mar. 22 email message.

Larry Ellison ‘Speechless’

The September 2010 agreement may have patched things up momentarily, but HP’s next move galled Ellison even more. A few weeks later, it chose former SAP chief Leo Apotheker as the man to replace Hurd. “I’m speechless,” he told the Wall Street Journal. “HP had several good internal candidates … but instead they pick a guy who was recently fired because he did such a bad job of running SAP.”

For Ellison, the Apotheker and Lane selections showed that HP was about to get serious about software, as it did with the $10 billion acquisition of business search company Autonomy. But even though Apotheker was ousted within the year, Ellison still seems to save a special kind of invective for him. Just last week, he refused to pronounce Apotheker’s name correctly and called him an “idiot” at the D: All Things Digital conference in Los Angeles.

Two weeks after HP hired Apotheker, Ellison ordered his database team to stop publishing performance benchmark numbers on HP’s Itanium systems, a move that eliminated an important selling tool for HP’s salesforce. According to Oracle’s database licensing agreement, HP was prohibited from publishing benchmark numbers without Oracle’s permission. Two months later, Oracle changed the licensing rate for its software on Itanium systems, eliminating a longstanding advantage that HP’s Itanium systems had enjoyed over other rivals.

The announcement that Oracle was dumping Itanium shook HP, but it also made a lot of big corporate customers angry with Oracle for sticking them with millions of dollars’ worth of soon-to-be-obsolete hardware. Take Camp Dresser & McKee (now CDM Smith), a Cambridge, Massachusetts, engineering company that had recently passed over Oracle’s Exadata servers for a $1.5 million Itanium-based system running Oracle’s database.

A few weeks after the news broke, the company’s CIO, Peter Palmisano, wrote Oracle asking the company to change its mind. Oracle’s decision was so abrupt that it was going to hurt his business, by preventing him from getting access to new releases. “Investments in enterprise class systems are made on a 5 to 10 year basis and cannot be changed on short notice,” he wrote.

Over at HP, executives were weighing all options, including the possibility of paying Oracle to keep up Itanium development. In fact, HP had already paid Oracle hundreds of thousands of dollars to ensure that other products — the Oracle Retail Suite and Demantra, a sales planning tool — ran on Itanium. But because the database brought in so much money for both Oracle and HP, there had never been a reason to pay Oracle before. On Mar. 28, the HP executive responsible for Itanium, Martin Fink, raised the idea of paying Oracle.

But his boss, David Donatelli shot him down. “Too early to go there,” he wrote back. “Customer outrage first. Once we even suggest money, all our paths are over.”

Donatelli and others at HP believed that if enough high-level customers made it clear that they blamed Oracle for the fact that they would have to scrap Itanium systems before their time, it might cause the database company to reconsider.

What followed was a high-tech game of chicken, with HP trying to portray Oracle as the villain to customers, while Oracle’s Ellison has gleefully watched HP’s Unix server sales drop, all the while coloring Itanium as a sham and a boondoggle. In June of last year, HP sued Oracle. Two months later, Oracle counter-sued, alleging that HP misled the world by not admitting that it was paying hundreds of millions of dollars to Intel to keep up development of its money losing chip.

140,000 Customers Caught in the Middle

In the middle of it all are some 140,000 customers who run Oracle’s software on HP systems. Many of them are looking to January of next year, the month when Oracle is expected to ship its next-generation database software. Unless the Santa Clara court orders otherwise, this software won’t run on Itanium.

By October of 2011, things had become so bad that HP’s Fink re-floated the “pay Oracle” plan, proposing that HP cough up a minimum of $20 million per year to keep Oracle’s latest software to Itanium. That too seems to have been nixed. “By October [2011], our business was in very, very steep decline,” Donatelli explained during a March 2012 deposition. “Martin was receiving budget cuts…. And he was, as you can imagine, an idea machine for different alternatives and ideas of how he could try and recover his business. This was one of many.”

But now, HP is running out of options. The company’s Itanium system sales are down 23 percent year-over-year and most customers are starting to plan for the demise of the product line, according to George Weiss, an analyst with the Gartner research firm

“Most users have gone from that denial period to: ‘It’s a fait accompli,'” says Weiss. “Oracle may have said that this was a business decision, and yet the reality is that they also want to crush HP as a competitor.”

Or you might say that Larry Ellison wanted to crush a company that had fired his tennis buddy before hiring a guy he thought was an idiot.